Peacock Ltd is a medium-sized electronic chip manufacturing company in Cambridge. It produces a new generation of chips for mobile phones which enable them to scan the mobile phone users environment for targeted advertising. The cost of producing each chip is estimated at 26.65 and the company will be selling them for 29. The company expects to make and sell 1,720,000 of these chips in the coming year. The total fixed costs of operating the company for the year are estimated at 3,540,000. The total production capacity of the company is 2,000,000 of these electronic chips per year. The total capital invested in the company is 5,160,000.

a) What should be the selling price of each chip at the current level of demand for the company to make a profit of 850,000 for the year

b) Would it be worth reducing the selling price of each chip by 0.45 and spending 75,000 on marketing if this strategy is expected to increase demand by 20%?

c) An overseas customer has asked to company for 1,000,000 of these chips in the coming year but at a lower price of 28 each. To increase the production capacity, the company will have to invest an additional 680,000 in plant & machinery. With this order, the production cost of each chip will fall by 0.10 as a result of the bulk buying discount of raw material. Should the company accept this order? What would be the companys overall return on investment (ROI) if this order is accepted.